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In its latest proposal on advertising standards, the UK Financial Conduct Authority (FCA) calls for new checks and balances on the gatekeeper firms that approve financial ads for other companies.
The FCA has proposed new measures to clamp down on illegal, unfair or misleading financial marketing, including additional screening checks for gatekeeper firms.
Under the new measures, firms that wish to offer advertising approval services to others will have to apply for permission and demonstrate they have the “right expertise” to act as an approver.
Gatekeeper firms will also be required to regularly report back to the FCA on the financial promotions they have approved, among other measures designed to improve FCA oversight of promotional content.
Under current legislation, any FCA-authorised firm is allowed to approve financial promotions on behalf of other unauthorised firms, without applying for any specific permission to do so.
The FCA’s proposed changes have been introduced to parliament under the Financial Services and Markets Bill, which seeks to amend the Financial Service and Markets Act (FSMA) 2000.
The bill, which will face a debate on amendments today (December 7), was first introduced by HM Treasury in July this year
The FCA said its proposed reforms will ensure that it can act quickly to put a stop to harmful promotions by unauthorised firms, especially in high-risk areas such as investment products, crypto-assets and buy now, pay later (BNPL).
Sarah Pritchard, executive director of markets at the FCA, said that reform of financial advertising rules is long overdue, given the digital-first environment in which financial firms now operate.
“Social media and online advertising means that consumers are taking less time between seeing a promotion and making a financial decision,” she said.
“It is therefore essential that they are equipped with the right information at the right time so that they can make good financial decisions.
“These proposals will ensure those approving ads have the appropriate expertise and are held accountable for the promotions they sign off.”
In 2019, the European Commission published a behavioural study on the digitalisation of the marketing and selling of retail financial services.
The study, which is referenced by the FCA in its proposals, found that the online environment puts a strong focus on providing products to customers as fast as possible, with as few barriers as possible.
As the FCA noted, this can endanger consumers if they do not take enough time to reflect on purchasing financial products.
What’s new?
The FCA’s full proposals are outlined in a consultation paper that will be open for public and industry comment until February 7 next year.
In addition to the application approval process described above, the FCA is seeking comment on whether firms agree with its proposed schedule for reporting on active promotional campaigns.
For example, the FCA has proposed that gatekeepers must submit a notification to the FCA within one week of every approval, withdrawal or amendment of a financial promotion.
In addition, the FCA has proposed that gatekeepers must submit a bi-annual report on their overall approval activity, detailing topline data points such as total number of approvals, total number of consumer complaints in response to approved promotions, revenue generated from approval activity and total revenue from all activity.
If adopted, the FCA said these measures would give it a much more detailed view of the overall promotional landscape than at present.
For example, it would allow the FCA to spot trends such as which gatekeeper is the most active or most profitable, and which companies, campaigns or sectors tend to generate the most complaints.
Authorised firms that communicate financial promotions, or that approve financial promotions for others, will be responsible for ensuring that promotions comply with FCA rules.
This includes a requirement that the promotion is “clear, fair and not misleading”, particularly on matters that are relevant to helping consumers make informed decisions, such as risk and return.
Historically, the FCA said it has seen too many non‑compliant promotions being approved and then communicated by unauthorised firms to retail consumers.
This has led to harm and losses for consumers, particularly in the consumer investments market.
“We’ve seen evidence of consumers investing in high-risk products that are not aligned with their risk tolerance, due to poor-quality approved financial promotions,” said the FCA.
“In the worst cases, the performance of investments was markedly different from the claims made in promotions or the product failed, in each case leading to significant and unexpected losses for retail investors.”
In addition to investment products, crypto-assets and BNPL are two areas of particular concern for the FCA.
This is because, although each is relatively small, both sectors are still mostly unregulated, and there are few authorised crypto or BNPL firms that could act as approvers for unauthorised ones.
At the same time, however, the FCA said this makes tougher advertising rules even more necessary for these two types of products.
Speaking of BNPL, the FCA said: “We have seen promotions of these products that do not prominently warn consumers of the risks, such as the risk of taking on debt they cannot repay, the consequences of missed payments and other possible adverse consequences such as the impact on their credit file.
“We have warned firms that offer BNPL products that although some agreements are unregulated, the financial promotions of all BNPL products must comply with the requirements of the financial promotion regime.”
The FCA said its proposed changes will help it to intervene faster in response to harmful financial promotions that are within its remit but are communicated by unauthorised BNPL firms.
Ramping up the pressure on rogue ads
The FCA said the proposals in its consultation paper build on the work that it and the Treasury have already done towards strengthening advertising rules since 2020.
This includes the FCA taking a more proactive and “assertive” role in removing misleading adverts that violate its standards.
Between January and October this year, the FCA removed or amended more than 5,000 financial promotions from authorised firms, compared with just 564 in 2021.
Separately, some FCA proposals for tougher rules on high-risk financial products have already been approved by parliament and came into force on December 1 this year, while others will come into force in February 2023.
